Analysis: Grey market grumblings a warning for the industry

It’s not been a great week for advocates of grey markets. Last Wednesday The Stars Group (TSG) saw its share price take a brief plunge after it announced of pending troubles in the Russian market, while yesterday 888 repeated the trick with news it may need to reassess its German-facing operations. The two issues aren’t connected but there is an underlying trend the online gambling sector needs to start paying a little more attention to.

The egaming industry has become a lot more comfortable with grey markets in the past two years, to the extent were we have listed organisations proudly discussing launches into Canada, Germany and even Asia. The latter in particular has been a huge growth market for operators both private and public, while Germany is the hot new market despite a total absence of a regulatory framework.

But it’s not that operating in any of these countries or regions is ill advised, more that it’s not clear if the market, investors and analysts have forgotten they come with an element of risk.

The regulatory cold war

After an initially fierce few years of hostility towards the egaming industry we seem to have settled into something of a cold war of late when it comes to grey markets. Regulators and governments wage a war of words with the industry, while enforcement attempts are few and far between. And in some regulated markets we’ve seen previously grey market operators brought into the fold with little fuss, while regulators in other markets seem to care little for activities elsewhere.

The cold war has led some to view many grey markets as broadly similar to regulated markets, but in reality they remain distinctly different. It’s all rather sedate, but that doesn’t remove any potential issues, not least a large back-tax bill several years down the line. Nonetheless attitudes have changed during this cold war period and in many ways you can look at the online gambling market as pre- and post-GVC.

In the period before GVC proved there was still plenty of life in the grey market model operators were falling over themselves to be whiter than white. Regulated markets were the only viable option for any legitimate operator and closing rather than opening unregulated markets was the order of the day. Post-GVC we’ve seen operators of all scales and risk tolerances launching into markets thought previously to be firmly off limits.

William Hill has been more aggressive in some greyer markets, Paddy Power Betfair has stepped back from its white or flight policy and even Sky Betting & Gaming has launched into Germany. There has also been something of a redrawing of the boundaries. One of the more persistent replacement terms of late is “locally taxed”, which has taken the place of “regulated” for many operators. Locally taxed allows operators to include Germany, where there is tax but there isn’t regulation, in their lists of regulated markets. But as 888 has shown this week this can be problematic.

There may be trouble ahead

888 noted in its annual results it was “assessing the status and breadth of its offerings in the German market” after one of its subsidiaries had been the subject of a ruling that upheld the “prohibition on offering online gaming in Germany under the German Inter-State Gambling Treaty”. It added “other providers (in the online and land-based sectors) have withdrawn from the German online gaming market, and recently payment institutions facilitating approximately 9% of deposits for the Group in Germany have decided to cease providing certain services with respect to the German online gaming market.”

For those with a keen eye on history, payments are the tool most often used to try and close down a grey market when the government is unable or unwilling to pass legislation to regulate or ban the industry. And the same blunt force tool looks like being used in Russia. As TSG noted in its annual results last week: “We are currently reviewing recent Russian regulations that will likely restrict the number of Russian payment processors who elect to engage with offshore online gaming operators.”

It should be noted neither firm is saying they are planning on pulling out of either Germany or Russia, and neither at this stage should they, but it’s part of the continual shifts in perspective on this issue. It’s not just Germany and Russia where there are rumblings. 888 also pointed to Canada saying future efforts to restrict the grey market are “a valid possibility”. And it’s arguable this could be the year that unregulated revenues begin to edge back out of fashion once more. 

Finding gold beneath the grey 

There are no signs of this in the current market, however, although there has been a shuffling of the deck chairs during 2017 with operators pulling out of Australia after the government there made what already appeared to be a fairly unambiguous law absolutely crystal clear in terms of its ban on online casino and poker. As a result of this some operators have simply found new grey markets to conquer. Because it’s impossible to deny the allure of these increasingly murky grey markets, as underneath the surface there is plenty of gold to be found.

Germany is a relatively untapped resource for most operators, Latin America is even more virgin territory with some serious headroom for growth in the next decade while Asia remains a hugely attractive market. Even within Europe it’s tough to argue you shouldn’t be operating in the Nordics and in a very different shade of grey the likes of Russia and the CIS and even Turkey are tempting depending on your risk profile. But while all of these present short-term revenue and profit enhancing opportunities they do carry with them both short and long-term risks.

The first regulated revolution at the beginning of the decade didn’t really live up to expectations. The number of white markets wasn’t sufficient to bring the industry with it, there simply wasn’t enough revenue to go around, but this has now changed. The EU is predominantly a patchwork of regulated markets and those moving towards regulation while the rest of the world is still mostly varying shades of grey.

The choice for some egaming operators is how long they can continue to exist on both sides of the fence.

Main pic credit: iStock/PointImages